MINISTRY OF DEFENCE: MANAGING REDUCTIONS
IN THE NUMBER OF VACANT FAMILY QUARTERS

MANAGING THE ESTATE EFFICIENTLY

21. The Executive must be ready to house applicants
on request, and the precise timing and number of those requests
is not wholly predictable. The Executive must therefore maintain
a proportion of empty quarters to be able to meet the demand for
accommodation from entitled personnel. In addition, there will
be vacant quarters that are allocated for an agreed deployment,
being modernised, awaiting disposal or demolition or being used
to accommodate families who need to be moved to facilitate upgrade
programmes or disposals. Together, these differing groups of empty
properties represent a margin that the Executive need to operate
the current system efficiently.[15]

22. The C&AG's Report noted that the Executive
had a key performance target to reduce the number of vacant quarters
to 13 per cent of the estate by March 2002 and to 10 per cent
of the estate thereafter. These were arbitrary figures and had
been set without reference to any analysis of what level of vacancy
would represent optimum efficiency in the allocation process.[16]

23. We asked the Department when, and on what basis,
they might devise a more meaningful target. We were told that,
discounting properties in the process of disposal, the Department
should achieve the 13 per cent target by Spring 2001. Beyond that,
the Department had adopted the National Audit Office's recommendations
so that their long-term housing plans were now built up sector
by sector from individual areas rather than given as a top-down
statement. They also took account of forecasts of Service requirements
over a four year period, surveys of people's preferences and trend
information. On this basis, the Department's best estimate was
that they would require a core housing stock of around 40,000
houses by 2005 with a management margin of 4,000 properties.[17]

24. The Department acknowledged that the previously
high vacancy levels and associated targets were the product of
an imperfect system. Previously, the three separate Services had
managed their properties independently within devolved budgets.
Once these were brought together with the creation of the Executive
in 1996 the scale of the problem had become more apparent and
the Department could begin to put in place the processes needed
to deal with it. The Executive's first task was to dispose of
surplus quarters but they were now moving on to look to manage
the whole operation more efficiently and the National Audit Office's
recommendations would help them to do that.[18]

25. We noted that the current long-term vacancy target
exceeded the margin of six to seven per cent that the Department
regarded as acceptable when giving evidence to our predecessors
in 1986. The target also compared unfavourably with margins adopted
by other public sector housing providers such as local authorities
and housing associations. The Department said that they were not
in the same position as other providers since Service families
moved on average every 18 months to two years, some 22,000 moves
a year, and they therefore required a high management margin to
cope with such a high turnover. The Department assured the Committee,
however, that they did use best practice benchmarks where possible
to do so. They had every interest in minimising the level of vacant
and unused properties within the estate.[19]

26. Area managers interviewed by the National Audit
Office said that, dependent upon refurbishment and modernisation
programmes, the management margin should be somewhere between
four and eight per cent of total stock.[20]
In evidence, the Department said that individual area margins
could vary between 3.5 and 20 per cent, for example where properties
were awaiting modernisation or where the Executive expected to
receive incoming unit moves within the next two to three years
in places like Aldershot.[21]

27. The C&AG's Report noted wide differences
in the vacancy rates achieved by areas. Two areas had triple the
target vacancy rate and eight areas had vacancy rates of more
than double the target.[22]
We asked whether the Department had management incentive schemes
in place, such as manager of the month, and whether they knew
who were the good managers or bad managers. The Department said
that they did not operate such schemes, though they had now instituted
a monthly review of disposals on an area by area basis. High vacancy
rates within individual areas did not necessarily relate to the
comparative efficiency of the managers concerned, but often reflected
the circumstances of particular locations. For example areas might
hold additional vacant property in readiness for incoming infantry
battalions due within the next year or two.[23]

28. The size of house to which personnel are entitled
varies according to individual circumstances. Officers and entitled
civilians are allocated quarters according to rank and appointment,
while other ranks' accommodation is determined by family size.
In all, the Executive provide nine different types of house to
satisfy these entitlements. The C&AG's Report noted that the
Executive's ability to provide families with suitable accommodation
efficiently would increase if the number of different entitlements
were to be reduced.[24]

29. We asked whether the Department had looked to
ease their management of the estate through simplifying the entitlement
criteria. The Department said that 80 per cent of housing was
provided for other ranks rather than officers and was therefore
allocated according to family size. They had nevertheless looked
at injecting more flexibility into the system. The "one down
rule", which obliged personnel to take accommodation one
grade below their entitlement where appropriate quarters were
not available, was to be extended to the Royal Air Force as well
as the Army and the Royal Navy. Other options used by the Department
to minimise the number of empty properties included the ability
to change the margin between senior and junior officers' quarters,
for personnel to pay for quarters above their entitlement and
to house eligible, rather than entitled, staff such as single
or married unaccompanied people. In future, new build programmes
would provide properties that would make it easier to move people
between houses. However, they had never recommended that the entitlement
criteria should be changed.[25]

30. The C&AG's Report noted that surplus properties
may sometimes not be released for disposal for security reasons
because the empty houses are located within the boundary of the
military base itself.[26]
The Executive confirmed that around 15 per cent of the estate,
some 10,000 quarters, were currently "behind the wire".
They had not determined in how many cases perimeter wires could
be moved so as to free up entire estates. However, they were currently
moving the wire at RAF Wyton and RAF Chicksands to allow large
disposals to occur and to free up the estate to ease future disposal
programmes. There were also a number of military bases, such as
Blandford, where a large number of quarters were situated well
behind the wire in the centre of the garrison. Where such houses
were of an acceptable size, and there was a long-term requirement,
the Executive would look to modernise them so that they could
dispose of other houses located outside the wire.[27]

31. The Department did not know how many houses located
behind the perimeter wires of military bases were vacant. They
were, however, moving the wire to allow them to dispose of 400
properties in the near future. For operational security reasons,
none of the empty houses located behind the wire could be offered
to non-entitled people, but they were available to be occupied
by people outside of their ordinary entitlements or from within
eligible groups. The Executive had, for example, offered flats
behind the wire to single Service personnel where there was a
shortage of barrack accommodation.[28]

32. The C&AG's Report noted that Service personnel
usually received around three months notice of a posting, and
those personnel wishing to live in family quarters at their new
location normally applied almost immediately to the new area housing
office. Some area managers were concerned, however, that they
often received little notice of an individual's posting out of
their areas.[29]
In evidence, the Department said that there was an understandable
reluctance on the part of families to notify area offices of their
impending departure until they had arranged such issues as their
children's education at their forward location. They confirmed
that they had now acted on the National Audit Office's recommendation
to ensure that, immediately on receipt of an application for housing
from Service personnel, the relevant area office would notify
the "losing" area of the relevant details.[30]

Conclusions

33. The Department's long-term target for a management
margin of vacant homes remains up to four per cent higher than
the margin they regarded as acceptable when giving evidence to
our predecessors in 1986-87. Their current estimates are too heavily
based on current housing practices, and pay too little regard
to the possibility of more efficient housing management, which
their own managers have indicated is possible.

34. Management margins of vacant stock at individual
area offices range between 3 per cent and 20 per cent of local
estates according to circumstances. The Department should monitor
area performance closely to ensure that each area retains only
the minimum margin necessary to administer its local estate effectively.
They should consider introducing an incentive scheme for area
managers designed to achieve greater efficiency in this respect.

35. A contributory factor to the high level of management
margin held by the Department is the complexity of the entitlement
criteria operated by the Department. While they have taken some
steps to increase flexibility in the allocation of housing, the
Department should review whether it would be possible to simplify
entitlement rules to allow more efficient use of available housing
stock.

36. Vacant family quarters that lie "behind
the wire" of military bases cannot be disposed of by the
Department unless the perimeter wire is moved. 400 vacant properties
will be freed for disposal in this way over the coming months.
The Department should review the scope for freeing-up more of
their estate in this way so as to minimise future disposal difficulties.

37. The Department have taken steps to improve the
information provided both to and between area offices about the
posting of Service personnel and associated movements within the
family quarters estate. Such improved communications are long
overdue and the Department will now need to ensure that the resulting
potential for improvements in the efficient management of the
estate are achieved.

39. In evidence, the Department confirmed that the
situation was now becoming more stable. Of around 60 different
changes arising from the Strategic Defence Review, some 15 or
16 were still to be completed. These included the reorganisation
of the Defence Logistics Organisation, the impact of the Defence
Education and Training Review in terms of where people should
be trained, and the consequences of the Department's joint force
structures, such as joint helicopter units and joint fast jet
units. In each of these cases the Department told us that it was
not possible to be absolutely certain of their future requirements
for individual locations.[32]

40. As the uncertainties associated with defence
reviews were removed, the Executive's planning arrangements would
become more robust. The Department believed that their long-term
housing plans were now more sophisticated than before, so that
they were better able to identify houses both for long-term retention
and for disposal on an area by area basis. The Executive believed
that their most positive achievement since the C&AG's Report
had been the ability to identify core stock. This would ensure
that they refurbished only those quarters that would be required
in the medium and long-term and that they disposed of all property
that was not intended to be part of the core. There was increasing
acceptance among Service commanders that it was in their interest
to focus on core stock in this way.[33]

41. We drew the Department's attention to the concern
expressed in the C&AG's Report that there were no financial
incentives for the Services to identify and release surplus houses.
At present, all rent and maintenance costs of vacant homes fell
to the Executive, even where the Services had requested that apparently
surplus property be retained. This allowed the Services to retain
as many empty properties as they wished, without any financial
responsibility for that decision. We asked the Department what
incentives they now intended to introduce to encourage local commanders
to release accommodation.[34]

42. The Department said that, while there were no
financial incentives for local Service commanders to release surplus
properties, the Executive now held formal quarterly meetings with
the military authorities. A dedicated team of Executive staff
liaised with local commanders to ensure that the process of determining
core stock and disposing of surplus property was pursued vigorously.
The time taken to agree with the Services those houses that could
be released had now reduced from 140 days to 90 days. The Services
were also now aware that any resources that could be saved through
more efficient management of the estate could be reallocated to
front line uses.[35]

43. The Department's biggest problem was that the
demand for family quarters was falling so sharply, by about four
per cent a year in recent years. The Department explained that
this reflected general social trends, such as the tendency to
get married later in life. A further factor was the importance
that people attached to buying their own property at a time of
rising values, or where the spouse's job was important. The underlying
need for family quarters remained strong, however, and was underpinned
by the operational need of the Armed Forces to move 22,000 families
each year. Continuous attitude surveys conducted by each of the
Services had shown that personnel placed a high priority on the
availability of appropriate and modern Service housing to compensate
for their turbulent and mobile lifestyles. Survey information
about people's preferences was one of the factors taken into account
in the Executive's revised long-term housing plans.[36]

44. The C&AG's Report noted that around half
the housing stock was in poor condition and needed upgrading,
disposal or demolition.[37]
In evidence, the Executive told the Committee that they had defined
an ideal standard for properties, referred to as standard one.
Properties that had only a few minor defects or one major defect,
such as in a bathroom or kitchen, would typically be classed as
standard two. A property that required complete refurbishment,
or a new kitchen and bathroom, would be classed as standard three
and would generally require families to move out while the house
was refurbished. The Executive said that they did not undertake
a full stock condition survey until 1997 but they estimated that
probably fewer than 1,000 of the 53,000 properties that they inherited
in 1995 met the strict criteria for standard one at that time.[38]

45. The Department had set the Executive a target
to upgrade 40 per cent of the estate to standard one and 40 per
cent to standard two by Spring 2001. The total planned expenditure
on the upgrade programme was £600 million. Of this sum, £48
million was spent in 1999-2000 while a further £68 million
was to be spent in 2000-2001. Since 1996, the Executive had upgraded
11,000 properties to standard one.[39]

46. We were concerned that so much of the estate
was not at standard one condition at the time of the sale, and
that the cost of upgrading the estate had subsequently fallen
to the Department under the terms of the agreement with Annington
Homes Limited. The Department assured us that they were trying
to focus the upgrade programme on those properties that they knew
to be core stock and for which there was therefore a long-term
requirement. They recognised that it would be foolish to focus
the upgrade programme on stock that was to be returned to Annington
Homes Limited.[40]

47. The C&AG's Report noted that around 2,200
houses were used for purposes other than housing entitled or eligible
families. Over half of these had been used for non-residential,
but defence-related, purposes such as crèches and family
support centres.[41]
We asked whether funding for such uses should be provided by the
Executive. The Department said that, in each case, the Executive
and the Armed Forces had been required to confirm that the houses
were being put to cost-effective use, for things that would otherwise
be provided at greater expense. Welfare offices and crèches
helped to sustain morale and retain personnel in the same way
as provision of Service houses.[42]

Conclusions

48. The Executive's ability to forecast accurately
demand for family quarters has been hampered by uncertainties
about force strengths and dispositions following the Strategic
Defence Review, though the position has now largely stabilised.
The Executive should remain in close touch with the Services throughout
the implementation phase so that their long-term housing plans
progressively become more soundly based.

49. There are currently no financial incentives for
local Service commanders to release surplus properties. All rent
and maintenance costs of vacant houses are met by the Executive.
While the Executive have improved their management arrangements
in this area and Service commanders are now more aware of broader
financial issues, we are concerned that the Executive's ability
to secure the release of surplus accommodation could be undermined
because the Services do not bear the financial responsibility
for their decisions. The Department should consider establishing
financial incentives by transferring to the Services the rent
and maintenance costs relating to those vacant houses that are
retained at the Services' request despite there being no identified
need for them.

50. The demand for family quarters has continued
to fall by around four per cent each year - around 2,000 families
a year. The Department now factor this in to their long-term housing
plans. Forecasting demand is a crucial factor in matching supply
to demand; but the extent of the fall in demand appears to have
undermined the Department's efforts to manage the estate effectively.
The Department should further refine the techniques they use to
understand the factors that influence demand so that they can
devise more rigorous forecasting.

51. On their formation, the Executive inherited 53,000
houses of which only 1,000 were rated as standard one for condition
(the ideal standard). As part of a modernisation programme to
upgrade the quality of the housing stock they spent £48 million
in 1999-2000 and now have 11,000 houses rated at standard one.
They have identified core stock, for which they see a long-term
need, and we support the Department in their aim to target resources
on that stock to avoid nugatory expenditure on houses subsequently
sold or returned to Annington Homes Limited.

52. Despite the Department's efforts to target their
upgrading work as above, we are nevertheless concerned that, as
the extent of the upgrade programme increases, it may be difficult
to avoid passing some upgraded properties to the new owners as
part of any surplus returned by the Department. In their examination
of the sale of the married quarters estate, our predecessors noted
that the Department had included in the sale agreement a clawback
arrangement on future exceptional gains made by the new owners.[43]
The Department should police closely the operation of the existing
clawback arrangements to ensure that they receive their full entitlement
to the added value achieved in cases where upgraded properties
have been returned to Annington Homes Limited.

53. Around 2,200 quarters are used for purposes other
than housing Service families, for example, family welfare centres,
crèches or the Executive's offices. While these uses may
serve to meet wider Defence objectives, they do not contribute
to the core purpose of such housing and are only possible because
of the present oversupply of family quarters generally. The Department
should permit such alternative uses only where it is clearly cost
effective to do so.

55. There was a dilapidations process, managed by
the Defence Estates agency on behalf of the Executive, which required
both the Executive and Annington Homes Limited to inspect each
house in order agree an appropriate level of payment to compensate
Annington Homes Limited for the cost of any repairs needed to
restore the property to the required standard. The process was
staff intensive for both parties and could take six months or
more, since the dilapidations claim for each house could vary
significantly depending on the condition of the property.[45]

56. We asked why so much notice was required. The
Department said that six months was the minimum period needed
to agree all the various factors involved in the release of houses
as freehold properties to Annington Homes Limited, so that they
had free and full title. It was necessary to protect the taxpayer's
interest by ensuring that the Department paid no more than was
needed to bring houses up to an appropriate standard. The provision
of utilities was sometimes complicated where houses had to be
separated from infrastructure that was previously supplied by
the Services, and it was necessary to secure road access in respect
of some houses. Earlier agreement of dilapidations would not,
in the Department's view, speed the release of houses since the
sale agreement required the Executive to give six months notice
of termination.[46]

57. We pointed out that Annington Homes Limited would
accept quarters before the end of the six month notice period
provided that negotiations on the financial compensation to be
paid to them by the Executive for any dilapidations to the property
were complete.[47]
The Department said that, in practice, the biggest constraint
on releasing more property more quickly was that the Executive
would have to move people out of houses in order to release them
in the middle of Service personnel's tours of duty. In this respect,
the identification and disposal of 6,500 properties in the current
year would require considerable turbulence for the affected families,
around 25 per cent of whom would need to be moved mid-tour.[48]

58. In considering the sale of the family quarters
estate to Annington Homes Limited, our predecessors had questioned
whether the deal had provided value for money. After four years
of operating under the new arrangements, it now appeared that
the Department had borne all of the risks with none shared by
the owners of the estate. Meanwhile the overall level and cost
of vacancies had increased while the size of the estate had reduced
during this period. We therefore asked whether the Department
could point to any real management benefit resulting from the
sale.[49]

59. The Department referred to their previous evidence
that the sale was judged to have provided value for money in relation
to the policies of the Government of the day. The sale had secured
receipts of £1.66 billion, while rent charges paid to Annington
Homes Limited were currently £109 million a year and represented
a 58 per cent discount on commercial valuations. The involvement
of Annington Homes Limited had sharpened up the commercial approach
that the Department had been taking. The Executive now had to
implement much more effective and efficient processes to balance
supply and demand. On the balance of risk, the Department said
that the owners were obliged to take properties that they had
released once the process of agreement was completed. To that
extent Annington Homes Limited faced the risks associated with
selling the properties into the market.[50]

Conclusions

60. While the Department need to minimise the amount
paid to Annington Homes Limited in dilapidation charges, dilapidation
negotiations can be resource intensive and time consuming. The
Department and Annington Homes Limited seem unable to agree on
ways to simplify the process further, though it should be in both
parties' interests to do so. The Department should explore, in
conjunction with the owners, ways of facilitating this process,
for example by reconsidering the use of joint surveyors to reduce
the scope for conflict in dilapidation negotiations.

61. The sale agreement requires the Department to
provide Annington Homes Limited with six months' notice to terminate
their lease of vacant houses, for which they continue to pay rent.
But we note that Annington Homes Limited will accept quarters
before the end of the six month notice period provided that dilapidation
negotiations are complete. The Department should encourage Annington
Homes Limited to accept the earlier release of properties where
all other conditions of release have been satisfied.

62. Other than for dilapidation negotiations, the
Department use the six month termination period to resolve issues
about, for example, the continued supply of utilities and road
access to released properties. Yet these houses will have been
identified for release some months before termination notices
are served. The Department should begin work to resolve such issues
at an early stage to facilitate the earlier release recommended
above.